Breaking the hedge fund case study

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Buy side interviews are a brutal process - preparing for interviews, sneaking out in a suit, networking, all while working 12-16 hours a day is a brutal process. While private equity interviews and hedge fund interviews are for different types of roles, they have many similarities.

They involve a lot of 'fit' interviews, having to know your technical and accounting cold, having to prove you understand the qualitative aspects of business, and both require a significant amount of luck as well.

And of course - the most difficult part of the interview process - the CASE. This is the point of the interview where your alma mater, what bulge bracket bank you work at, who you know, what suit you wear - none of that matters. If you can't handle the case study portion of the interview, you won't get the gig no matter how well you fit in.

Typing up an investment thesis and building a model while at work, hiding Excel and Word windows when your colleagues walk around you, and being completely mentally exhausted yet still having to focus on acing your interviews is not a pleasant experience.

However, it helps to know what to expect. So here is an overview of my own personal experience with the case study (and overall interview process). I keep things in general terms but the main concepts - having a 2 minute intro for your thesis, how to structure the write-up, and how to work efficiently are applicable to any case study. This obviously applies to case studies where the fund gives you the name of the investment in advance. I know many PE firms now do live case studies where you come in and have 3-4 hours to read and write things up..

I was a desk analyst focused on distressed/high yield credit at a bulge bracket. I never did banking, and so I didn't have the opportunity (or desire) to interview for PE roles. And further, even within the hedge fund world, many different interview processes exist. The case study is fairly common amongst most of them, and comparing notes with other people who have gone through the interview process (and having conducted interviews myself), I think the process that I went through was pretty typical, and at the very least will be helpful for people who are beginning the process.

You'll have multiple rounds before the case study

A lot of people use their network or headhunters which effectively pre-screen a lot of candidates. The first round interview is usually much more fit oriented. Sure, there will be some technicals, but given you've done banking or research or something else relevant for 2-3 years, at this point they'll focus on how you'll fit in and how you think, not if you can walk through the steps of how depreciation affects a cash flow statement (this should be second nature by now).

Have good answers during the fit oriented portion of the interview process for who you are and what you want:- Show how motivated you are in your personal experiences as it relates to your resume (cold-calling alumni to get your first relevant internship, starting student organizations, running a side business in college, etc.)- Show you clearly understand the role you are applying for and what you want to do. Don't just say 'oh this fund has had +25% returns last year so its good' - know something about the culture and the role and how your personality and goals mesh with what the expectations are.- Speak POSITIVELY of your experience at your current firm. The last thing you want is for people to think they are hiring a perennial whiner. Everyone has started at the bottom of the totem pole - you aren't special because you pull all-nighters or think you are super smart. Be less negative and more positive.- Have a reason for why you want to leave - 'my learning experience there has been great, but want to focus more on long-term investing' or 'I think I've learned all there is to learn in my current silo' or something along those lines - but make sure you don't berate people on a personal level. After all, Wall Street is a small community and you don't want to talk badly about someone's friend by accident.

Also have ideas and opinions on the economy and long/short ideas:- Where you think the opportunities are for investing and what macro themes are relevant to the fund/team you are interviewing for.- Have a couple of long ideas and short ideas that are outside of your domain of expertise - its better to have 2-3 ideas you know very well, including memorizing specific financials and recent performance, as well as why the securities are currently mispriced.- Know a few of the fund's SUCCESSFUL investments and have relevant thoughts on them. I wouldn't hassle Bill Ackman about Herbalife for example, but mentioning a high profile win for the fund and how you appreciate their investment approach shows you did your homework.

Most importantly, know your resume cold. This may seem obvious. But if you have something that takes up six words on your resume ('Did due diligence on small E&P company' for example), you should be 100% comfortable speaking about that for 15-20 minutes. Anything is fair game if its on your resume. If you are really good, you'll be able to transition any question they have into broader themes you are familiar with (ie this E&P company company was a good investment...overall, I'm bullish on that region where it is located because of low breakeven economics...here are some other companies I like in that space' etc. Basically, make them realize you know what you are talking about.

Starting the case

After you pass the initial interview stages, you'll eventually get an e-mail or a phone call giving you the case study prompt. It ranges in terms of how descriptive they tell you the case study needs to be. It could be just a ticker, or it should be a template.

For me, it was 'Take a look at XYZ company and tell us what you think, here's the ticker'. Turns out the company I got was an extremely highly leveraged (close to defaulting) company with illiquid equity and a single bond outstanding. I was given one week to prepare - sometimes the window is smaller, but I think 4-5 business days plus a weekend is more standard now. For me, I think I got the prompt on a Tuesday and had to present it the following Monday.

Of key importance: most of the case study assignments are either investment positions the company holds, or they are looking into. As a result of this, you'll want to have a view that doesn't contradict what the firm is already doing. Try to figure that aspect out as you dive into the investment idea.

Also of key importance: they will assign you a case in an industry where they expect you to not have any experience in.

My goal for the finished product:- Have a 5-10 page written document which presents my thesis in an organized fashion- Have a completed model with projections- Have multiple charts/graphs with relevant macro data for the company I was researching- Have a 2 minute opening statement when talking about my company (after which I would open it up to Q&A).

Here is how I prepared for my case study on a five day schedule:

Day 1:

- Gather materials. Download all relevant documents on the company you can find. Look up research reports. Look up recent news articles, print everything from the company website.- E-mail that company's IR department. This is HUGE. Getting in touch with the company itself and asking them to provide things such as a bond indenture or latest financials is clutch - even if you don't need them, you'll impress your interviewers with taking it to the next level. Name dropping executives is a good way to do things - if its a top-tier fund, they've likely sat down with management directly and have opinions on them.- Look for trading runs on the name to get a sense for who trades it and at what levels - you might need to have a friend in fixed income trading if it's a bond security, but if it's a stock you'll have all the data you need from the Google.- Find industry primers - reach out to your firm's research analysts to try to get this stuff.- Print everything out and carry it with you at all times in a bag.- Read everything in your downtime. Form an idea. Figure out the comparable companies and read earnings transcripts from those companies to learn key themes.

Day 2:

- Start your investment thesis - decide if you want to go long or short the name - typically you'll want to go long just because most funds lean long.- Whip up a basic model (not your final version which I save for later). Don't spend much time on it - make sure everything flows and have your operating assumptions be base case. If it's a credit interview, have a base case and a downside. If it's an equity interview, have a bear case and a bull case. The reason you don't spend much time on the model on Day 2 is that because you are just learning the company, you want to get something on paper but you'll be tweaking this significantly.- Get more in depth with your reading of the company's financials. Have a piece of paper separate from the rest of your notes where you mark down page numbers of key corporate actions (acquisitions, early debt redemption, dividend, dent issuance) that you can go back and refer to.- Drill down on the primers and try to have at least 2-3 conversations with people who know the sector- Get a set of macro data, print it out - you'll be including this in an appendix.

Day 3:

- This is when you focus on the model. Drill down on the financial statements and make the model as simple as possible. I typically have 2-3 drivers, basic income statement (down to EBITDA only for me, given my credit focus). Have a basic balance sheet. Have EBITDA, capex, cash interest, cash taxes, and working capital for the cash flow statement. Have lines indicating funds spent on acquisitions and dividends, as well as debt reduction, among other sector relevant things.- Start drilling down on your investment thesis as you work on the model. By the end of Day 3, you should have at least 4-5 pages of relatively unorganized notes. Begin to refine this.- Do some due diligence into customers/suppliers into the company you are looking at to get some additional 'channel check' style data points for your write up.

Day 4:

Day 5:

- Review and learn everything you've done cold - be an expert on this company and this sector. Be confident. Know the names of the management team. Know all the details - biggest customers, competitors, suppliers, earnings results.- Prepare your two minute case intro - this should be a 90-120 second introduction to the name.

The finished product:

How your investment thesis should look when you send it to your interview (you usually can e-mail them ahead of time with it, though I always would print out hard copies as well):- Intro page: This should be just 1 page, and this will contain the company's name, description, 52 week high/lows along with a a graph of the company's securities pricing, historical financial summary, along with estimates for Sales, gross margin, EBITDA, FCF, or whatever relevant metrics you see fit for the next 24 months. And the most important part: the actual thesis, where you cite what you think the price target is, when that price target is established, and 3 reasons why you'll reach that target.- Company history: 1-1.5 pages on the company's history (spinout? Founder owned still? LBO? Distressed emergence?).- Company description: 1-1.5 pages, where you overview each of the business segments, margins for each segment, historical performance, and which segment you would highlight as the key driver for the combined company.- Thesis: 2-3 pages where you delve into your thesis, backing up your arguments with both macro data, historical data, projections from your model, and reasons why you think the market has largely unrecognized the upside potential.- Macro/regulatory: Give a macro overview on the company's sector, including graphs with relevant benchmarks. This can be longer or shorter depending on how much macro exposure the company has.- Comparables - find 3-4 solid public comparable companies, include a comp table, and have some qualitative similarities/difficulties. Your goal should be to use the comparables to further the argument in your own thesis.- Price target and conclusion - go over different methodologies to triangulate/support your price target, which include things such as yield compression to comps, sum of parts analysis for a recovery, and anything related to technicals. Be explicit with what price range you expect, what the catalysts for this will be (strong earnings due to new product outperforming for example), and be concrete in the analysis you do to come up with it.

Overall, the 5-10 page investment thesis size should be good. PDF it and send it over, and bring hard copies in a bag for everyone as well. Also have 3-4 pages of 'Appendix' where you have relevant charts and graphs from research reports, the company's own documents, and other sources such as the government for regulatory stuff.

The actual interview

I was brought into a conference room where 2-3 analysts and the PM were sitting. I immediately opened my bag and handed out copies of my write-up and began my memorized two minute intro: "This was a very interesting case study...I believe there is significant upside for the following reasons...I think it is mispriced because of this...now we can delve into any aspect of the case that you think is valuable".

Then it was basically 3 hours of Q&A. Mine was a weird experience - after my first hour, it became clear that my current fund was long the name (and ironically, I am now the lead analyst on it), and I was super bullish in my thesis. So I sort of hit the nail on the head during the first part. The second part focused on accounting and the model - this was a weak part for me because I wasn't familiar with the cost structure dynamics of the industry I was working with, but they saw I knew how to build a model and understand the drivers, and at least for my team, they cared more about my qualitative discussion. And the third hour was mostly fit and ideas I had worked on at my current bank.

The key for the interview - if its in a roundtable format, make eye contact with the person asking you a question, but when speaking generically always face the most important person. The second key for the interview - DO NOT BS. Always say 'that is something I would love to look into but haven't looked at' if they bring up a concept familiar.

They will ask you what your research process was. This is where you can 'brag' about reaching out to investor relations, research analysts, reading primers, etc. They will ask what you enjoyed about the process. Always ask questions back. You should have already met most of the team, so act like you are a warmer relationship with them than you did your first time in.

Staying healthy

When I was going through the brunt of recruiting I was exhausted and tired on a constant basis. Eat healthy. Eat snacks constantly that up your energy level. Try to not drink too much caffeine. Get enough rest. Slack off at work a little - I always kept a privacy screen on my monitor while I worked during the day so I could do interview prep. Don't drink on weekends when you have interviews coming up. Try to stay in good physical shape. And stay positive - you'll have more chances even if it doesn't work out.

Always send thank you notes and always reach out to people and build your network as well.

I know a lot of what I wrote was very general because I don't want to give away too much about my own process in terms of specifics but will be happy to answer any specific questions. Also, this is what worked for me. I'm sure different people work in different ways, but for me this was a useful guideline.

I always kept a privacy screen on my monitor while I worked during the day so I could do interview prep.

Fantastic write-up as usual, but this sounds like it would throw up some red flags to coworkers..

Actually, we always had privacy screens laying around in case we were pulled "over the wall" for certain situations - so most people probably thought I had some info on my screen they weren't supposed to read, rather than hiding anything (and most of the time this would be true).

Obviously, if no one on your floor has a privacy screen up, I would not suggest being sketchy.

Given the organization and thought that you put into an anonymous post here, it's pretty easy to imagine how you were able to get that offer. +1 SB.

Question: How long did it take you to write this up?

I feel like it would've taken me a long time (lots of edits), which makes the process more draining. If you can quickly throw together something like this, that's a big advantage when having an edge in a stock pitch is only as effective as your ability to pitch it.

Given the organization and thought that you put into an anonymous post here, it's pretty easy to imagine how you were able to get that offer. +1 SB.

Question: How long did it take you to write this up?

I feel like it would've taken me a long time (lots of edits), which makes the process more draining. If you can quickly throw together something like this, that's a big advantage when having an edge in a stock pitch is only as effective as your ability to pitch it.

I would say I spent 15 hours researching and writing the investment thesis out, 5 hours on the model (again, it was relatively simple with just a few drivers), and ~10 hours tweaking and revising and speaking to people who knew the sector/were familiar with similar stories. So all in about 30 hours of creating content, then probably an additional 5-6 hours of preparing for Q&A and my intro. Yeah, I spent a lot of time on it. The name was so small and illiquid that there was absolutely no sell-side coverage (or really any direct comps) and a totally foreign industry at the time (though now I cover it exclusively) so I probably spent a little more time on the research aspect.

I always write a lot, and I use the outline method where I put in high level bullets onto my notes, and then fill in the sub-bullets over time - that helps speed up my due diligence process.

Fantastic post. I rate it along the lines of Simple As' and Blackhat's research process posts. Obviously they were geared towards on the job research, but this post is as good as theirs in detail and usefulness.

Great post. The one thing that I am not sure about is going long/ short just to match their view. I don't agree with that and believe that if you could prove they were wrong they would appreciate it (as long as you are right :)). If I was the PM and you proved my (analysts) thesis wrong before I lost any money I'd be happy. Plus it may make you look smarter that the guy/ gal who did the original thesis.

I have to present a hedge fund case study on a stock to a long/short shop on Tuesday. The company is a fairly known retail company. Does anyone have any experience doing take home case studies and then presenting them for hedge funds? Would love to have some guidance and examples if possible. I know I dont have a lot of time.

2 questions on these hedge fund case studies:1) If you're going in to present a stock they picked for you, does that mean they prefer a powerpoint or written submission?2) Since they picked the stock, what if you don't find it compelling to buy or sell? Can you pitch a price a target that's not too off from market or assuming that's frowned upon?

I'm too inexperienced to be any type of authority here, but I've had a few of these and typically when they pick a company for you it's either one they've recently done some work on and ended up not putting a position on (in which case it's okay to be mum on giving a recommendation) or a company they already have in their portfolio. Only suggestions I'd have for you are to look at the 13F and see if they own the company long or short, and if not then don't worry about "getting it wrong." Just present a valid case or evidence that makes it okay to not have conviction one way or the other. They want to see how you analyze a company and how you go about picking a stock, there's typically not a right or wrong answer (unless they're long the company and you have it as a conviction sell...)

I will also assume this isn't a first round interview for you, so you should hopefully understand their style.

That should help you focus your efforts - do they only care about whether the Company will beat the street in the next Q, or are they looking at the bigger picture.

Second, understand and be able to critique the bull and bear case. Read sell-side research. Chances are, there's one or two assumptions on which the Buy/Sell decision hinges. If you recommend buying the stock, you should expect them to throw the bear case at you and be able to defend yourself. You don't have to recommend being long or short, you can be in between, but know at what price you'd buy it or short it.

Lastly, it all depends on how junior you are. If you are coming out of an investment bank, they are clearly considering that background and may want to see a detailed model, transaction / tradingcomps. The less junior you are, the less important that becomes.

Have looked everywhere for info on the standard hedge fund case study interview and haven't been able to find any good insight or tips on the forums or on the net. There's loads of good stuff for PE Case Studies - I'm guessing these are similar minus the LBO analysis? Does anyone who has had success going through the process have any insight?

Personally HFs are unstructured, even their interviews so theres no fixed formats or documents.

The ones I had were mainly case studies but more on discussing the idea, valuations, industry dynamics, pros and cons etc. No modelling, i mean seriously, HFs dont operate on a 5-10 year basis so solid models are irrelevant, ideas are generated fast and decision made quickly.

If for value, which fortunately i had experience with as well. Typically your knowledge on accounting and how it affects numbers as well as understanding of businesses and cycles and impact on prices and firm performances is crucial. Under value theres also several school of thought so depends which one its under.

Forgot to mention, the fit with the team if its small is very very important. Cant emphasize that enough.So typically, every member of the investment team will speak to you and if one says no, then your out.

I have done a search on WSO but have not found extensive discussion on this topic. Does anyone have any experience / example that can share? I know this may depend on the fund strategy so let's assume this is for a distressed / credit fund. Anything specific I should be aware of?

Yep...difficult to understand exactly what you're asking for. I'll take a leap and assume this will be a relevant suggestion:

http://www.amazon.com/Investment-Banks-Hedge-Priva...It has case studies of hedge fund transactions, goes into a lot of detail about those transactions. It is floating around on the internet as a free PDF, if you can find it. Gigapedia had it, though it looks like Gigapedia is now dead. RIP.

If you are moving to a HF from elsewhere, they'll likely provide you with a name.

If you are in the industry, you should be prepared to talk about several ideas during your interview.

When I was interviewing to get into the industry, I was told "do some work on Company XYZ and tell us what you think - get back to us in a week; don't spend all night and day" as they realize you likely have another job. I've never had, and I can't think of any of my friends who have mentioned being tasked to do run through a case study during the interview period.

If you are a banker, you'll likely spend a lot of time on modelling, putting together comps, throwing it all into a flashy powerpoint presentation, etc. And that might be what they are looking for - someone with a banking background that has that skill set.

These days, my write-ups are all 1 pagers, maybe with a table of some important calcs that drive the story. Now it is much more about how you look at names, seeing where and why the market may be undervaluing the security, and thinking about how that will all change.

If you are moving to a HF from elsewhere, they'll likely provide you with a name.

If you are in the industry, you should be prepared to talk about several ideas during your interview.

When I was interviewing to get into the industry, I was told "do some work on Company XYZ and tell us what you think - get back to us in a week; don't spend all night and day" as they realize you likely have another job. I've never had, and I can't think of any of my friends who have mentioned being tasked to do run through a case study during the interview period.

If you are a banker, you'll likely spend a lot of time on modelling, putting together comps, throwing it all into a flashy powerpoint presentation, etc. And that might be what they are looking for - someone with a banking background that has that skill set.

These days, my write-ups are all 1 pagers, maybe with a table of some important calcs that drive the story. Now it is much more about how you look at names, seeing where and why the market may be undervaluing the security, and thinking about how that will all change.

Thanks. If I do get the "do some work on Company XYZ and tell us what you think - get back to us in a week". What would be the best way to approach this? Should I write a one pager? I was a banker so I do have the typical banking analyst skill set you mentioned, though I am not sure that's what they are looking for. I don't have too much research background so I want to make sure I do this as efficient as possible without going crazy reading industry research, etc.

depends on tyour background. are you familiar with creidt analysis at all?

generally it's not much different from a fundamental analysis case study. you learn what the company does, and build a model depicting the growth and give a solid presentation of why would you (or not) to invest in this company.

The thing to watch out for is that you need to treat credit a bit differently. You are essentially buying the upside on tightening of the spreads once people realize that this company might not be as bad as they think. Also, you need to look at how protected you are i.e. if it's a secured term loan, what's the asset that the lien is on? how much are you covered? how much cash does the company has?

worst case scenario assuming you dont see this company filing for chap 11 is simply getting paid back once the debt matures and you collect the coupon in between and perhaps the face value if you bought it below 100

of course there are a lot more to it, but it might be helpful if i actualy know the fund to actually see what specifically they focus on.

The tough part is trying to guess what they want - hopefully you know a bit about the fund - are they value investors? Bottoms up or top down? High turnover or buy and hold?

Given they are interviewing a banker, they may well want to hire someone who can do all the typical banking tasks. Don't let that keep you from standing out. The other bankers you are competing against will do similar work.

In my situations, it has always been buy and hold types, so here's the outline of what I did (again, these were equities)* Read Ks, Qs, transcripts for every quarter going back two years* Read sell-side research* Put together tradingcomps / deal comps (if they are interviewing a banker, they might do so b/c they want this type of work)* Build a detailed model and be ready for them to want to open it up during an interview

I then put together a nice looking ppt (again, I was a banker and this is what bankers do / what they might like)* Overview of Company* Industry - comments on what is going on* SWOT analysis* What's the Upside case?* What are the keys to having that come true* What is the bear case?* Summary / recommendation* Further work - this has been key for me. I've found it important to provide the caveat saying "I only had a week, but given more time I would..." It's not an excuse - it's a way to show them how you think.* Model, comps, etc as appendix.

Once you've done this, put together a one-pager. It's never a problem to have too much (such as a ppt deck), but a PM might say "I don't have time for this, I need someone who can convince me within 2 minutes" - then boom - here's my one pager and now I can give you my elevator pitch since I know the 10 minute version and have whittled it down to two minutes.

My last bit of advice - the HF world is all about focusing on what matters, so figuring out what matters is key. There's one way to do this, but for help, look at sell side research and see where the disagreement is. Top line growth? Gross margins? Etc.

The tough part is trying to guess what they want - hopefully you know a bit about the fund - are they value investors? Bottoms up or top down? High turnover or buy and hold?

Given they are interviewing a banker, they may well want to hire someone who can do all the typical banking tasks. Don't let that keep you from standing out. The other bankers you are competing against will do similar work.

In my situations, it has always been buy and hold types, so here's the outline of what I did (again, these were equities)* Read Ks, Qs, transcripts for every quarter going back two years* Read sell-side research* Put together tradingcomps / deal comps (if they are interviewing a banker, they might do so b/c they want this type of work)* Build a detailed model and be ready for them to want to open it up during an interview

I then put together a nice looking ppt (again, I was a banker and this is what bankers do / what they might like)* Overview of Company* Industry - comments on what is going on* SWOT analysis* What's the Upside case?* What are the keys to having that come true* What is the bear case?* Summary / recommendation* Further work - this has been key for me. I've found it important to provide the caveat saying "I only had a week, but given more time I would..." It's not an excuse - it's a way to show them how you think.* Model, comps, etc as appendix.

Once you've done this, put together a one-pager. It's never a problem to have too much (such as a ppt deck), but a PM might say "I don't have time for this, I need someone who can convince me within 2 minutes" - then boom - here's my one pager and now I can give you my elevator pitch since I know the 10 minute version and have whittled it down to two minutes.

My last bit of advice - the HF world is all about focusing on what matters, so figuring out what matters is key. There's one way to do this, but for help, look at sell side research and see where the disagreement is. Top line growth? Gross margins? Etc.

Great post on investment process in general, not just interview pitchs/case studies, SBed.

For credit funds, downside case assumptions are more important than base/upside assumptions, although you of course should have a reason as to why spreads will tighten and you will make money. Realistically, diligence will be in the further work category, but if you can do something (go to a store, call a family friend in the industry, etc.) it is a huge plus in my opinion.

Currently working on a case study for a credit fund. Have some questions I was hoping you fine gents could help me out with.

As a general overview, I'm pitching a company that I believe is misunderstood by the market. Its earnings have been extremely lumpy due to restructuring, acquisition and divestiture expenses along with goodwill impairment for the past 2-3 years coming out of the worst of the recession. The market lumps it in an industry that's experiencing secular decline but I believe the majority of its business is differentiated and not tied to that space. After taking care of a looming maturity on a piece of its debt and completing these restructurings, I think its P&L will clear up and the company will start trading at its true value.

I'm planning on valuing it on a sum-of-the-parts basis. If I believe these catalysts will happen in the next year or so, how do I think about timing here? Should I apply recent transaction or trading multiples to my estimated 2013E EBITDA for each business?

1a. If I run a DCF, I'm deriving the value as of today - can I use that EV to calculate a share price target that will be realized sometime in the future?

Any other considerations in a SOP analysis I should be aware of? Things that might not be attributable to a particular segment (e.g. NOLs)?

What is the ideal length of a case study? I know a general stock pitch is generally 1-2 pages - should a case get more granular?

I plan on calling IR with a list a questions I've compiled during my research and possibly doing some channel checks. Never done it before - how does this work in practice? Does someone pick up and I just start asking questions? Do they typically take calls from students/regular people or should I make up a "hedge fund" I'm calling from?

This is part of the 'art' vs. 'science' of investing - it's usually helpful to think about valuation from several approaches. For valuation multiples, try to think deeply about what the 'right' number might be for each business rather than just slapping a comp on it. Transaction multiples might be too optimistic unless you're expecting a divestiture, comps might need to be adjusted, etc. Is EV/EBITDA the right metric for this type of business?

I would use a forward multiple on a clean earnings number regardless of the timing of catalysts to think about valuation. Discount it back if needed. The timing of catalysts might affect when and under what circumstances you'd actually want to own the business, not so much how you'd value it, unless there's something unique and concrete coming up (e.g. they have a put on some acquired business).

1a. Yes. It's usually more useful to think about how the current price differs from your estimated intrinsic value today, but there's nothing stopping you from rolling the model forward and calculating EV at some future date and making the necessary balance sheet assumptions to get to an equity value. Of course your WACC assumptions will matter and you might want to think about whether your required return and what you've assumed the market requires are coherent.

Is the business really separable? Is there operating leverage on corporate overhead if parts of the business are disposed of? Have you accounted for inter-segment eliminations appropriately? Does one part of the business rely on another for funding? These are all potential objections to a SOP. Otherwise, make sure you don't overlook the value of non-operating assets (and liabilities) like NOLs (again, these may not be separable). Do they have excess real estate, investments, or complex financing arrangements?

Ask. A good investment write-up can be anywhere from 1-100 pages - it really depends how much detail they want to read vs. talk through vs. check that you can do.

Politely call or email introducing yourself as a private investor and request time for a phone conversation. Some firms prefer questions to be emailed, some will schedule a time to talk with you. Do not lie - if you end up working in the industry there's a good chance you'll want to talk to them again. Call to follow up. IR is there to help, but the more money you manage the more quickly you tend to get a response. So just be persistent, but polite. For channel checks, no one can stop you from calling people you've found and asking questions (they don't have to talk to you, but if you're friendly and trustworthy they're more likely to), just be ethical and nice about it. Funds often pay to use expert networks, but you can often get pretty far on your own without paying people to talk to you.

Great response - thanks for taking the time. SB for you when the credits hit my account.

I think EV/EBITDA works for my company - the industry has average leverage (~4.5x) but my company's is a bit higher so I want to exclude effects of capital structure. My plan is to triangulate value for each piece by using trading/transaction comps and possibly a DCF, add them up, subtract out debt/pension/etc. to get equity value, then divide by shares o/s to get my intrinsic value per share.

Can you expand on what you mean by forward multiple on clean earnings? Aren't earnings only CF to equity? Also, it feels awkward to break out NI for each business, value the equity, and add back debt for each segment. Or am I thinking about this wrong?

The business lines are fairly distinct so I think they'll be able to be split pretty cleanly. There's a component of corporate overhead but it's 10% of the cost structure so I don't think it'll make much difference. I was planning to divide it pro-rata by sales among the divisions in my DCF. I have EBITDA % breakout for each segment, so am going to use that for my comps analysis.

Can you expand on what you mean by forward multiple on clean earnings? Aren't earnings only CF to equity? Also, it feels awkward to break out NI for each business, value the equity, and add back debt for each segment. Or am I thinking about this wrong?

By "clean" earnings I meant your estimate of earnings ("earnings" as a general term for EBITDA, NOPAT, NI, even FCF, really whatever metric makes the most sense for the business and you're comfortable with) excluding the restructuring charges and other non-recurring items. The idea is to only capitalize what's really repeatable.

On awkwardness, it's usually easier to value the operating businesses separately from the financial liabilities. For a DCF by segment it's probably easier to arrive at the EV of each segment separately using operating income and then subtract out all the non-equity claims at the end. There's nothing wrong with looking at the debt for each segment independently, though, and that might even make more sense if the company has some kind of non-recourse debt in a subsidiary.

When given a new company to analyze for a hedge fund case study, how do you guys usually go about coming up with a differentiated view from consensus when you only have a short period of time? Would appreciate any tips!

If they've given you the company to work on it's likely that they have a position in it themselves and think there's potential in it.

Like I said in your other thread, it depends on the company's particular situation/story and no one can do your work for you and tell you a catch-all answer. Read the filings, read the news releases, read the research reports, build the model and the story will come out if you're astute enough.

One piece of advice I will give you - search VIC, seekingalpha, random blogs for write-ups. There's a good chance someone saw the same thing your fund saw and wrote it up.

Thanks Bonobo. Didn't mean to come off as lazy. It's just that it seems really difficult to come up with a view that's more informed than analysts and especially management ("I think segment A will actually do a lot better than management's view and grow at 6% instead of 3%").

That's the thing - you can't. There's no way you're going to know the company better than Management even if you follow it for years.

Your thesis shouldn't hinge on a 6% vs. 3% growth rate or using a 5x multiple vs. a 6x multiple. That's getting too bogged down in the details. No one can know what it's really going to grow at and you aren't going to get any points by changing an analyst's growth rate by 50 bps.

Management says it'll grow at 20%? Great, throw in 20%, but run a sensitivity so you know what happens if it doesn't and when the company will break.

Even though every interviewer obviously wants to be dazzled and surprised by your completely original outside the box thesis on the name they assign you, don't try and be a hero coming up with some bizarre perspective on the business that is gonna be totally phony. I'm the last one who wants to admit it, but sometimes the consensus is actually closer than we give it credit for.

I'm currently a credit hedge fund analyst with 5 years of experience (2 years at a top bank + 3 years in mega HF). Need help with the hedge fund case study? Ask below.

Based on my experience interviewing for hedge fund jobs, the case study has been key in landing interviews (i.e., include case study with resume) and in progressing through the rounds of interviews (HFs mostly care if you can make money and don't care as much about fit Q&A). Online guides on case studies that I've read tend to focus on structure/format; I focus on improving the in-depth analysis and content that will actually get you the job. (FYI - if you would like detailed feedback on your case study, e-mail at thehfguide at gmail dot com)

I find these threads hard to believe. How on earth do you have the time or the energy to look at random case studies from people you don't even know during your free time? Everybody is so busy as it is, and any free time we can get is clearly not spent on doing other people's work.

The HBS guys have MAD SWAGGER. They frequently wear their class jackets to boston bars, strutting and acting like they own the joint. They just ooze success, confidence, swagger, basically attributes of alpha males.

My thoughts exactly. I ah... decided to say something on the safe side.

The HBS guys have MAD SWAGGER. They frequently wear their class jackets to boston bars, strutting and acting like they own the joint. They just ooze success, confidence, swagger, basically attributes of alpha males.

I have worked on a few long / short equity case studies (and may be taking you up on your offer shortly) but, I was hoping you could shed some light on how to prepare case studies for a credit fund given your current position.I may have an interview coming up with a credit / special situations team and am at a bit of a loss on where I should start, any guidance / thoughts on how to approach this?.

Nobody in their right mind would tell you that hedge funds "don't care as much about fit Q&A." Also, case studies don't get you the interview... they're given to you during the interview process (usually after a first or second round). If anything, you'd be sending a short investment pitch with your resume, which you don't really need some random guy looking over on WSO. Hopefully I'm wrong, but nothing about that post sounds like something a guy 5 years in the business who's feeling charitable would have wrote.

I'm an undergrad and have recently gotten to know someone quite high up in the hedge fund I'm at this summer. He's asked me to lunch next week and wants me to do a case study, like they get their full-time hires to do prior to interviews, regarding a certain pharmaceutical company. The company is small, ~1B, and made up entirely of pipeline projects. Very, very small amount of money coming in through licensing.

Really at a loss for how to valuate it even crudely. We've talked before about small-cap biotech stocks (we've both done science undergrads, the fund to my knowledge has no investments in the biotech/pharma field) and he's given me the impression that valuation is almost a worthless endeavor as it's hard to predict even a year out where the company will be, and you have little revenue, never-mind profit, to point to.

Any help, or examples that are out there, would be greatly appreciated.

Maybe that's what he's looking from you: anything. He probably just wants to see how you think through the investment. I know absolutely nothing about pharmaceutical companies expect the basics of FDA trials. If it was me, I'd include a decision tree on how you think the stock would react if the next big decision gets a thumbs up/down. Maybe talk about the history of recent decisions of the FDA panel and any recent comparable drug approvals/disapprovals.

If I was trying to value completely pipeline products, I would reverse engineer the DCF based on whatever the current price is, see what the market is expecting in terms of FCF in the next few years, and start my analysis there. Based on clinical data, current phase, competitive drugs, etc, make an informed decision whether you think a given drug will be passed. Based on the drugs you think have a high probability of passing, project out what you think FCF will be for each drug and do a sum-of-the-parts in a way. If it's less than the market you would recommend a short/avoid, and the opposite if you think FCF will be more than the market anticipates.

I know many guys on this forum are against the idea of a DCF, but this would be my take. Reverse engineering the DCF gives you what the market thinks will happen, so you can you use that as your basis of comparison.

I agree that he's looking more for a holistic approach. My biggest worry would be putting in a valuation, for the sake of putting one in, and it being rooted in too many hypotheticals. DCF seems like a good starting point, thanks again.

Reverse engineering a DCF in biotech is not a good approach to small-cap biotech companies.

Please refer to a book that I use often in my job, Biotechnology Valuation by Karl Keegan. It is entirely based on decision tree analyses of pipeline valuation.

It has the ability to show you how to evaluate Phase I/IIa/IIb/III probabilities for certain therapeutic indications and how to apply other probability metrics across a pipeline of therapeutics.

Sorry, let me provide an example...

Let's suppose you have a monoclonal antibody therapeutic. It is in Phase II, and has an estimated launch of 2016. Based on evaluation of Phase I clinical data (safety) and based on immunological response success in animal models of this particular monoclonal antibody, you give a success rate of 60% to Phase III, and a 50% success rate from Phase III to commercial (30% total success rate).

Typically, peak sales are drawn out to 4.5 years post-commercialization (2016 launch + 4.5 years). After outlining an epidemiology/pricing model for your indication, you apply your potential peak sales to the 4.5 year time frame. A royalty rate is generally assumed in small-cap biotechs, due to high cash burn rates. Applying a potential royalty rate, along with a probability of success outcome, you arrive at a weighted peak profit. Then, generate a NPV based on your peak profit occurrence (2020 and "a half").

Same thing would apply to all therapeutics in the pipeline, summing NPVs (like @"bmlswish" did in "sum-of-the-parts).

There's all sorts of ways to derive valuation in biotech. This is generally the small-cap approach. There's other approaches like royalty buyouts, out-licensing valuation, etc...

Thanks so much, that's exactly what I've been looking for in terms of finding a direction to move forward in. The company I'm looking at is actually in the RNAi field, so as I'm sure you know everything is still quite early stage for most and there's lots of volatility.

I just picked up Biotech Valuation and was wondering if you had also looked over Valuation in Life Sciences by Bogdan? It also seems to be quite popular.

Thanks so much, that's exactly what I've been looking for in terms of finding a direction to move forward in. The company I'm looking at is actually in the RNAi field, so as I'm sure you know everything is still quite early stage for most and there's lots of volatility.

I just picked up Biotech Valuation and was wondering if you had also looked over Valuation in Life Sciences by Bogdan? It also seems to be quite popular.

Yeah the problem with RNAi therapeutics is that there's nothing viable past Phase III, only one I'm familiar with is Alnylam's ATTR indication for your potential probability weighting, but there's so many indications RNAi can target, it's just so tough to grasp haha...

You may want to broaden your probability weighting to just a general "gene-editing" category, and see if that's a reasonable enough approach to your valuation, and maybe just go slightly more granular on the difference (i.e. Sangamo's ZFP is a tool to insert edited-genes (do not include in the weighting) vs. Alnylam's RNAi is strictly edited-genes for transcription (include in the weighting)). Pricing for the therapeutic post-commercialization is the easy part after that...

I've seen Bogdan's book, but I haven't read it yet. The most successful man I've met in biotech told me to pick up Keegan's book; let me know if you pick up Bogdan's as well, as it looks interesting!

Exactly! Alnylam's the only one close to having a human proof of concept (they believe they'll have 5 or 6 by 2015). With their new delivery system ESC-GalNAc it certainly is beginning to show potential for making significant impact without crazy frequent/dense dosing regimes (10x more potent than their previous GalNAc system).

I've picked up both books (I believe they're both ~400 pages so not too crazy), and I'll let you know how I like Bogdan's. Thanks again for everything!

There seems to be several discussions started regarding case studies and a request for assistance and/or presentation format etc. However, I have not actually seen anything clearly written out step by step. I came across another website that lists step by step instructions. For the integrity of this site, I will not link it unless given permission by an administrator. However, here is a brief overview of how one should create a case study. Credit goes 100% to the site that I read this off.

Bear in mind that there are several popular hedge fund types.Global MacroL/S FundsEvent DrivenMarket NeutralDistressed DebtEMMulti Strategy

There are other strategies that hedge funds employ, however, these are some of the most popular. The steps listed below in creating your case study will typically be applied to equities related funds. This will be explained below:

Recommendation - you should start with a clear idea of buy or sell. A "hold" isn't going to get you any brownie points unless they presented the stock in advance and asked your opinion. Beyond the buy or sell recommendation, indicate a value or what it should be worth based on your analysis.

Company background - Here you will present an overview of the sector, the sector trend, some overall "macro" information about where this sector is headed and some key multiples.

Investment Reasoning - this is going to be your unique twist, and where you will start to shine. Give 2-3 some compelling reasons why you have come up with your recommendation, and why you think the security is undervalued/overvalued.

THIS IS THE PART THAT SHOULD BE PARTICULAR TO THE FUND STRATEGY. For instance, at an event driven firm, your reasoning should be based of a driving force that is event driven such as new tax environment, lawsuit, spin-off, merger or bankruptcy (also used at distressed debt strategy firms).

At a global macro fund, you may not be using stocks to showcase your talents, however, the basic premise remains that the driving force behind your reasoning will be the hedge funds style of trading. So if you are pitching a case study that pairs Eurodollar bundles with a JPY carry trade, your reasoning can simply be based on a mean reversion strategy that has dominated the markets since the ECB announced more QE.

Stimulant - What is the impetus that will drive your security to the point where you have recommended it should be? Lets take a real example happening right now - " tax inversions" (http://goo.gl/AgVdKk, http://goo.gl/sW8sYs) A lot of hedge funds are trying to clue in on the potential effects if any laws or "loopholes" are closed. (if you can think of a great strategy here, you will look awesome because all the hedge funds are trying to figure something out)

Your job is to outline and detail the stimulants effect on the security you chose. You might say, "given that company xyz has offshore activities in the range of $$$, and the companies directors are in the USA, I believe the the security will drop to ABC even in the uncertain environment where we don't know if the loophole will be closed. If a tax law is passed, then I believe security should drop further to XXX because it will reduce their revenue by X% and that has not been priced in yet." The catalyst is a particular tax regulation, and you have presented driver that will "push" your security to your recommended value.

Backup with valuations: Depending on what you have recommended, you will backup your work with valuation models, graphs and ranges. Use a combination of DCF, precedents, multiples or whatever is relevant. The type of valuation you use will be based on what you have suggested. Any combination of models should be used here, merger, LBO etc. Of course, the numbers/assumptions you present may be challenged so be prepared to back them up or use a range. That way you have conservative to aggressive and you can present a risk/reward sliding scale.

In terms of global macro valuations - you can use models and forecasts created by various economic institutes including IMF, CEPR, CBPP, NBER

Risks and reducing risk: considering its a HEDGE fund, risk management is very important. Present the possible downside to your recommendation, and ways to reduce that risk. To reduce the risk doesn't necessarily mean that you must take on an alternate position. If the risk of losing 10% is 20% and potential gain of 15% is 50% that is a risk/reward profile that you can highlight as the reason for the pitch.

Personally, I am in the process of creating some case studies and this is one of the areas that I take very seriously. I perform some hardcore stress testing (when possible) with intensive VAR analysis using delta normal, historical simulation and Monte Carlo and I try to include tail risk.

It is true that a case study can take hours and hours of research, and you may come up empty handed. However, this will be the work that you will be doing once you get the job. Out of hundreds of strategies tested, only a few pan out, so its not unlike the work you will be doing when actually working at a fund.

Hopefully, this was of some value, and other experts can fill in some of the blanks that I can copy and pasted into this guide.

How do you folks prepare for these? It's my understanding that generally they will ask you to prepare something beforehand, or atleast give you a name to become familiar with.

I have been informed that I will be completing a case study/project when attending a final round, however I have no color as to what this could entail. Their brain teasers and call transcript questions give me an indication of what they feel is important, otherwise I'm clueless. Thanks in advance.

Wondering if someone who's gone through the hedge fund recruiting process can provide some advice based on my current situation: I've been invited to do an in-house case study for a L/S TMT fund. I'll have about 3 hours for the case study, and am wondering how detailed the model is typically expected to be (i.e., should I expect to be building out a full debt/tax/depreciation schedule?) Trying to decide how best to allocate time between model building and reading/thinking. Thanks for your help!

You can tell Complexity by the time they give you.. however, there are definitely exceptions to what I am about to elaborate on. If you are given 3 hours for this model exam, expect it to be complex in nature. If it is a 45min exercise, expect it to be a more basic type exam which may include forecasting Cash Flow, I/S, and B/S... In total, forecasting all these lines, mainly WC, AR, AP, Other, Inventories, cash, M&A/BB/div as well as all the turnover ratios, should be an easy input for a 45min model exam. In 3 hours, you should be able to not only build out or edit an existing model, but build in LBO, SOTP, and DCF models from the existing model. If you cannot do this, you're not ready for this interview.

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